Therefore the portfolio should consist of large company common stocks and intermediate-term government bonds
. As shown in Exhibit 1, financial market instruments are risky when risk is measured by the annual standard deviation of returns.
As shown in equations (1), (2), a combination of common stocks and intermediate-term government bonds tends to result in a lower level of risk
Note that substituting intermediate-term government bonds for Treasury bills, as shown in equations (1), (2), tends to produce 10.02 percent return with a risk of 16.38 percent.
Over 20-year periods, the minimum return on the S&P 500 stock index was 3.1 percent - nearly double the 1.6 percent minimum earned on intermediate-term government bonds
. Thus, if one is concerned about minimizing downside risk over the long run - as when investing for retirement security - historical evidence seems to favor a diversified portfolio of common stocks.